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EBay Buys Skype for $2.6B

Light Reading
News Analysis
Light Reading
9/12/2005
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eBay Inc. has agreed to buy Luxembourg-based VOIP service provider Skype Technologies SA in a deal worth an initial $2.6 billion, but potentially worth $4.1 billion.

The online retailer will pay an initial $1.3 billion in cash plus 32.4 million shares, currently worth $1.25 billion -- plus a further payment of up to $1.5 billion in 2008 or 2009 if financial targets are met. The deal is expected to close in the fourth quarter of 2005.

eBay's share price closed Friday at $38.62. Today's news sent it down 76 cents, nearly 2 percent, to $37.86 in pre-market trading.

The acquisition represents a mammoth return on investment for Skype's backers. Since the company was formed in 2003 by Niklas Zennstrom and Janus Friis, it has received an undisclosed initial round in December 2003 -- from Bessemer Venture Partners, Draper Investment Co., Mangrove Capital Partners, and Tim Draper as an individual investor -- and a further $18.8 million in March 2004 from a number of investors, including Draper Fisher Jurvetson and Index Ventures (see VCs Pump $18.8M Into Skype ).

Zennstrom, Skype's CEO, and Friis, the firm's VP of strategy, are to retain their roles, with Zennstrom joining eBay's senior executive team.

So what is eBay getting for its money? For a company with quarterly revenues of more than $1 billion, and net income in its latest quarter (ended June 30) of more than $290 million, Skype, which employs about 200 staff, won't be adding a great deal to the bottom line. The VOIP firm, best known for its free voice services between its users, generated just $7 million in sales in 2004 from its pre-paid SkypeOut and SkypeIn services, and is set to record revenues this year of about $60 million. This, though, is set to rise to $200 million in 2006, according to Skype's estimates.

Probably more importantly to eBay, Skype has 54 million registered users that the online retailer can add to its marketing arsenal. The initial payment of $2.6 billion values those registered users at just more than $48 each.

eBay estimates the acquisition to be dilutive to its earnings until the end of 2006, when Skype is set to break even. In the long term, it expects Skype's operating margins to be in the 20 percent to 25 percent range.

In an official statement, eBay says the addition of Skype's voice and messaging services to its online marketplace and PayPal payments platform "will create an extraordinarily powerful environment for business on the Net. Is that worth up to $4.1 billion? Light Reading's readers have their doubts (see Readers Scoff at Skype Hype).

eBay's move comes as a number of high-profile online companies throw their hats into the VOIP ring (see Microsoft Buys Skype Rival, Google Talks the Talk, and Yahoo Enters VOIP Fray). Google's move into voice is seen as a particular threat to Skype's model (see Poll: Google's Shooting for Skype).

Another VOIP service provider, Vonage Holdings Corp., will be watching the fallout from today's news with particular interest. Given Skype's high valuation, Vonage and its backers might feel this is the time is right to make a fundraising move (see Sources: Vonage Is Eyeing the Exits).

— Ray Le Maistre, International News Editor, Light Reading

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mattroberts
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mattroberts,
User Rank: Light Beer
12/5/2012 | 3:02:24 AM
re: EBay Buys Skype for $2.6B
What year is this?! I thought it was 2005 but it must be 1999 and the Nasdaq is over 5000.

I'm glad I don't own any ebay shares!
shadowpawn
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shadowpawn,
User Rank: Light Beer
12/5/2012 | 3:02:24 AM
re: EBay Buys Skype for $2.6B
I hope that Ebay doesn't kill Skype like they have done with paypal.
BigBrother
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BigBrother,
User Rank: Light Beer
12/5/2012 | 3:02:23 AM
re: EBay Buys Skype for $2.6B
I think the PayPal and eBay marriage seems ok and does delivery enough revenue and profit, I am not sure about Skype though.
dljvjbsl
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dljvjbsl,
User Rank: Light Beer
12/5/2012 | 3:02:23 AM
re: EBay Buys Skype for $2.6B
I have a box of old touch tone phones in my garage. Some of them have speed dial buttons. Some even work.

These are on offer to the highest bid from any Internet company. Reserve bid is $875,000,00.00
illuminati
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illuminati,
User Rank: Light Beer
12/5/2012 | 3:02:23 AM
re: EBay Buys Skype for $2.6B
Two reactions:

1. AOL-Time Warner..................

2. There's now hope for all of us in the pre-ipo world. The great days are back ! (Doubt it thought)
paolo.franzoi
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paolo.franzoi,
User Rank: Light Sabre
12/5/2012 | 3:02:22 AM
re: EBay Buys Skype for $2.6B

Good lord the lack of imagination here stuns me. Imagine bidding on e-bay, but then having to go to work. You could have your Skype service at work CALL you when you got outbid. Cool hunh?

For real though, business is business. E-Bay will need to figure out how to make this business a positive value to their existing business. It seems unlikely that you will be able to add advertizing to Skype without getting disconnects. So, I am greatly puzzled on how value will be derived. But I will listen to the conference call and see.

seven
geof hollingsworth
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geof hollingsworth,
User Rank: Light Beer
12/5/2012 | 3:02:21 AM
re: EBay Buys Skype for $2.6B
48% of Skype revenues generated in Europe, 25% of Skype users are business users, 1.9bn product searches on eBay, 30% of bidding on eBay occurs in the last two hours of listings (suggesting the immediacy of contact angle is indeed significant), eBay users exchange 5m emails per day at present, Skype capex in 2006 estimated at $2m.
voyce_overipee
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voyce_overipee,
User Rank: Light Beer
12/5/2012 | 3:02:21 AM
re: EBay Buys Skype for $2.6B
Good lord the lack of imagination here stuns me. Imagine bidding on e-bay, but then having to go to work. You could have your Skype service at work CALL you when you got outbid. Cool hunh?

Oh I think imagination here is alive and well. we're all imagining how we can start our own company for a few million to make a softphone and give it away for free, and get $2.6B in return. Then we're all imagining how we can spend the pay off.

Of course ebay could have also imagined how it could have acquired a softphone maker for $50 million or less, then paid users $20 each to use the software for less total net money and probably larger user base. I mean they just bought users for $48 each, and these are users with no contractual obligation or physical constraints to continue using skype. in fact i imagine the reason people use skype is because it's free.

or ebay could have imagined using SIP, or even the PSTN to make calls to users when they're outbid, for a lot less than $2.6B, probably for many years. but i imagine they didn't buy them for that ability.
rcblender
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rcblender,
User Rank: Light Beer
12/5/2012 | 3:02:20 AM
re: EBay Buys Skype for $2.6B
So I figure the angle eBay has on this is that by adding Skype you'll encourage more business with people who have/want eBay Stores - basically anyone who makes some form of a living selling on ebay - because now they'll get basically a "business phone line" so to speak and make it even more of a "regular" business for themselves.

I still agree that this is a bad idea...though I was pleased when they got PayPal, it did make transactions very smooth when I won auctions.

-RCB-
boozoo
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boozoo,
User Rank: Light Beer
12/5/2012 | 3:02:20 AM
re: EBay Buys Skype for $2.6B
Interesing though to see how EBay will manage to bring Skype to China (where VoIP telephony was recently declared illegal).

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